Download Monetary Policy Statement December 2008 Contents

Monetary Policy Statement
December 20081
This Statement is made pursuant to Section 15 of the Reserve Bank of New Zealand Act 1989.
Contents
1.
Policy assessment
2
2.
Overview and key policy judgements
3
3. International developments and outlook
7
4.
Recent developments in the domestic economy
15
5.
The macroeconomic outlook
22
A.
Summary tables
29
B.
Companies and organisations contacted by RBNZ staff during the projection round
34
C.
Reserve Bank statements on monetary policy
35
D.
The Official Cash Rate chronology
36
E.
Upcoming Reserve Bank Monetary Policy Statements and Official Cash Rate release dates
37
F.
Policy Targets Agreement
38
Appendices
This document is also available on www.rbnz.govt.nz
ISSN 1770-4829
1
Projections finalised on 25 November 2008. Policy assessment finalised on 3 December 2008.
Reserve Bank of New Zealand: Monetary Policy Statement, December 2008
1
1
Policy assessment
The Official Cash Rate (OCR) has been reduced from 6.5 percent to 5.0 percent.
Ongoing financial market turmoil and the marked deterioration in the outlook for global growth have played a large role
in shaping today’s decision. Activity in most of our trading partners is now expected to contract or grow only very slowly
over the next few quarters.
Economic activity in New Zealand will be further constrained as a result, compared with our view in October.
Inflation is abating here and overseas as a consequence of these developments. We now have more confidence that
annual inflation will return comfortably inside the target band of 1 to 3 percent some time in the first half of 2009 and remain
there over the medium term. However, we still have concerns that domestically generated inflation (particularly local body
rates and electricity prices) is remaining stubbornly high.
Today’s decision brings the cumulative reduction in the OCR since July to 3.25 percent, and takes monetary policy to an
expansionary position. Given recent developments in the global economy, the balance of risks to activity and inflation are to
the downside. Thus it is appropriate to deliver this reduction quickly to support the economy and keep inflation from falling
below the target band.
Monetary policy is working together with the depreciation of the New Zealand dollar and the fiscal stimulus now in train,
to provide substantial support to demand over the period ahead and to create the conditions for some rebound in growth
as global conditions improve.
To ensure the response we are seeking, we expect financial institutions to play their part in the economic adjustment
process by passing on lower wholesale interest rates to their customers.
Further movements in the OCR will be assessed against emerging developments in the global and domestic economies
and the response to policy changes already in place.
Alan Bollard
Governor
2
Reserve Bank of New Zealand: Monetary Policy Statement, December 2008
2
Overview and key policy judgements
Activity in the New Zealand economy has contracted since
partners are estimated to be entering recession, while
the start of 2008, reflecting the impact of many domestic
growth in Asia is also expected to slow materially. This
and external shocks. The economy is moving from a position
leads to a projected marked decline in the terms of trade
where productive capacity and the labour market were very
relative to the September Statement, with sharply lower
stretched after a long period of strong growth, to one where
export prices outweighing the current fall in oil prices.
considerable slack is starting to build up. As a result, the
Lower trading partner growth is also expected to lead to
macroeconomic imbalances we had seen are starting to
weaker export volume growth.
unwind.
• The increase in financial market dysfunction that
Households are cutting back their spending. Ongoing
occurred during September and October is reducing
housing market weakness is resulting in a decline in house
the amount of credit available to households and
prices and significantly less new house building. For some
businesses and slowing the pass through of the lower
households this is being compounded by falling financial
Official Cash Rate (OCR) to retail interest rates. Banks’
wealth and/or reduced liquidity via falling equity markets,
access to term funding from overseas has been severely
and developments in the finance company and mortgage
curtailed and the funding that is being raised is more
trust sectors. Rising prices for necessities, such as food,
expensive and limited than it was prior to the deepening
electricity and petrol, along with rising effective mortgage
of the crisis.
rates – the average rate across all borrowers – have also
These forces have already adversely affected business
constrained spending over the past year, especially on
confidence. With the prospect of weaker domestic activity,
discretionary items, such as cars.
we expect firm profitability and investment to be cut back
Firms are also being buffeted from many directions,
by more than we projected in September. At the same time,
with weaker demand, rising costs, declining margins, and
further deterioration in household financial positions as
the lagged effects of the previously high New Zealand
a result of falls in house and equity prices, and a weaker
dollar all taking a toll. These factors have led firms to take
employment outlook, will continue to constrain household
a more cautious approach to investment, cut back on the
spending.
hours their employees work and, increasingly, reduce staff
Fiscal policy is expected to provide some offset to these
numbers. Unusually dry weather last summer also detracted
negative factors, reflecting a combination of ongoing growth
from growth, via its effects on agricultural production and
in government consumption and investment spending, and
hydro-electricity generation, thus playing a major part in the
larger and earlier personal tax cuts.
timing of when the economy entered recession relative to
other economies.
From the start of 2010 we expect the economy to pick
up momentum, although given the nature and severity of the
We estimate the economy contracted modestly in the
global forces operating on the economy, there is considerable
September quarter and forecast little growth in activity
uncertainty about the timing and strength of the rebound.
from now through until the middle of 2009. Thereafter, we
Our projection assumes that global financial markets start to
forecast growth to begin to recover, but to remain below
normalise during 2009 and the global economy begins to
trend until 2010. Growth is weaker over this period than we
recover. The latter will support an increase in export volumes
projected in September.
and prices, as the fundamental drivers that underpinned
The main factors contributing to the weaker near-term
the rise in prices for some of our commodity exports over
outlook are:
recent years reassert themselves. In addition, we expect
• A further deterioration in the outlook for trading partner
the rebound to be supported by the fact that firms have
economies results in their growth being expected to
entered the downturn with relatively strong balance sheets,
fall to a multi-decade low in 2009, with only a limited
easier monetary conditions – with the lower exchange rate
recovery in 2010. Most of our developed country
in particular assisting tradable sector competitiveness – and
Reserve Bank of New Zealand: Monetary Policy Statement, December 2008
3
few signs of a medium-term excess supply of housing given
Excluding the first-round impacts on prices of the Emissions
the significant falls in residential investment we have seen.
Trading Scheme (ETS), annual inflation is expected to be
Overall, we are projecting annual average GDP growth
around 2.3 percent by mid-2010 (figure 2.2).
to trough at -0.2 percent around the middle of 2009,
With inflation pressure declining, and credit spreads
before rising to 1.3 percent in March 2010 and 4.3 percent
continuing to widen, these projections incorporate a
in March 2011 (figure 2.1). This is a more protracted and
much lower 90-day interest rate track than in September
marked cycle than we projected in September.
(figure 2.3), with rates projected to move into a stimulatory
position.
Figure 2.1
Figure 2.3
Gross domestic product
90-day interest rate
(annual average percent change)
%
6
Projection
%
6
%
10
5
9
4
8
3
3
7
2
2
5
4
Central
Sept
MPS
1
1
0
0
-1
-1
1995 1997 1999 2001 2003 2005 2007 2009
Source: Statistics New Zealand, RBNZ estimates.
The extended period of very weak activity over 2008 and
2009 is expected to result in a sizeable build-up of excess
capacity. This, along with falling petrol prices, is expected to
drive a significant easing in inflationary pressures. Surveyed
inflation expectations have already fallen. Annual CPI
inflation is forecast to fall briefly to just above 11/2 percent
in the September quarter 2009 before increasing again as
recent falls in petrol prices drop out of the annual rate.
Projection
9
Sept
MPS
8
7
6
Central
5
4
%
10
6
5
2000
2002
Source: RBNZ.
2004
2006
2008
2010
4
The downward revision to the 90-day interest rate
projection implies a significant reduction in interest rates for
new borrowers. The effective mortgage rate is also expected
to start declining, but relatively slowly. The lagged response
of the latter is primarily due to the preponderance of fixedrate mortgages in New Zealand.
In addition to inflation, other macroeconomic imbalances
are also forecast to reduce over the projection period. We
expect the current account deficit to reduce from around
Figure 2.2
81/2 percent of GDP in June this year to just over 6 percent
CPI inflation
by the end of the projection; the household saving rate to
(annual, ex-ETS)
become significantly less negative; and indicators of house
%
6
5
Projection
Sept
MPS
%
6
price overvaluation to reduce significantly.
5
4
4
Monetary policy judgements
3
3
The next year or two will be very difficult for the New
2
2
1
0
Central
Zealand and global economies. Moreover, the severity of
the financial crisis means there is considerable uncertainty
1
about the future path for activity and inflation. The ongoing
0
dysfunction in financial markets also means there is some
2000
2002
2004
2006
2008
Source: Statistics New Zealand, RBNZ estimates.
2010
4
Reserve Bank of New Zealand: Monetary Policy Statement, December 2008
Box A
Figure A1
Recent monetary policy decisions
Official Cash Rate
After being held at a cyclical high of 8.25 percent since
%
9
%
9
8
8
7
7
6
6
5
5
July 2007, the Bank reduced the Official Cash Rate (OCR)
by 25 basis points at the July 2008 OCR review (figure A1).
Global credit conditions, which deteriorated noticeably
from August last year, pushed domestic lending rates
higher than would usually have been associated with an
8.25 percent OCR. The OCR was reduced by 50 basis points
at the September Statement and by a further 100 basis
points at the October OCR review, taking the cumulative
4
reduction to 175 basis points.
Source: RBNZ.
1999
2001
2003
2005
2007
4
At the time of the September decision, CPI inflation
had not yet peaked. However, the outlook for activity had
in global financial markets during October. The Bank
deteriorated further and credit pressures had intensified. This
determined that monetary conditions could move to a less
led to an expectation that inflation pressures would abate,
contractionary stance and therefore reduced the OCR at
such that inflation was expected to return comfortably
the October review. Further reductions were signalled as
inside the target band. These downward pressures on future
likely, but the pace and size of these would depend on the
inflation intensified further due to adverse developments
outlook for activity and inflation.
uncertainty about the effectiveness of the tools policymakers
the economic outlook warrants monetary conditions moving
are using to support growth.
to a stimulatory stance relatively quickly, and have reduced
Compared with the September Statement, the outlook
the OCR by 175 basis points between July and October
for domestic economic activity is weaker and the forecast
(figure 2.4). Monetary conditions have become significantly
path for CPI inflation is lower. While there are still risks on
less contractionary due to the October OCR decision and
both sides, we believe very weak activity over 2008 and
subsequent interest and exchange rate declines and we
2009 will see CPI inflation fall back inside the target band
expect them to move to a stimulatory position over the
by the middle of 2009 and remain there over the medium
coming period.
term. In addition, falling petrol prices have reduced the
risk of current high headline inflation becoming imbedded
Figure 2.4
in inflation expectations. Indeed, the latest readings of
Cumulative easing in policy interest rates
surveyed inflation expectations show a material decline.
%
0.0
%
0.0
-0.5
-0.5
-1.0
-1.0
-1.5
-1.5
-2.0
-2.0
We are therefore projecting a further easing in monetary
conditions over the projection period.
The main question we have been facing is how far and
fast monetary conditions should be eased. We have been
conscious that if monetary conditions remain tighter than
necessary for too long, then there is a risk that the period
of weak growth in the New Zealand economy could be
exaggerated and/or the inflation track pushed through the
bottom of the target band. We have taken the view that
-2.5
Euro area US
NZ
Australia
UK
Canada Sweden
-2.5
Source: Datastream.
Note: Change is between 1 July and 26 November 2008.
Reserve Bank of New Zealand: Monetary Policy Statement, December 2008
5
As is discussed in chapter 3, the global financial crisis
businesses are tighter than they have been for some time.
deepened in October after the failure of several large
The increasing wedge between expected OCR and retail
financial institutions in the United States. Credit spreads have
interest rates is also one of the main motivations for the size
increased and credit has become more difficult to obtain;
of reductions in the OCR since July. We do not expect this
risk aversion has increased; money and equity markets are
situation to improve significantly for some time, and there is
less liquid and much more volatile; and financial institutions
a risk it may deteriorate further.
are much less willing to lend to each other. Policymakers
Households are expected to continue to be cautious
have moved aggressively to try and reverse some of these
with their spending. Household saving from income is
developments, and there is some evidence of conditions
expected to increase in the face of falling house and equity
improving in some areas. However, in aggregate, global
prices and a more uncertain employment outlook. How
credit conditions remain very tight and are expected to be a
businesses respond to the weaker outlook in terms of
source of risk for the global economy for some time.
employment and investment is an area of uncertainty and
Together with consistently weak economic data,
will be a key determinant of the depth and duration of the
the deepening of the global financial crisis has seen the
downturn. While we expect sizable declines in employment
outlook for global growth deteriorate significantly since the
and investment, even sharper adjustments are possible.
September Statement. This has prompted central banks to
Falling petrol prices are forecast to drive tradable and
cut interest rates significantly and governments to add fiscal
headline CPI inflation down sharply over the next year,
stimulus. The trough in trading partner economic growth is
notwithstanding the decline in the exchange rate. Potentially,
projected to be deeper than previously expected, with most
annual inflation could fall briefly to the bottom of the target
of New Zealand’s developed country trading partners in,
band if petrol and food prices decline further.
or about to enter, recession, and the mild recovery pushed
Non-tradable inflation is likely to be slower to fall than
out until the second half of 2009. As a result, year average
tradable inflation. Electricity price rises and local authority
trading partner growth is forecast to be much lower in 2009
rate increases are forecast to hold inflation up over the
than in 2008, and 2010 growth about the same as 2008.
next few quarters. Similarly, construction cost inflation is
Our projected outlook is in line with that implied by the latest
only declining slowly, despite the large fall in residential
Consensus, IMF and OECD forecasts, but we believe the risks
investment. There remains a risk that price inflation in
remain weighted to the downside. These risks relate partly
parts of the economy that are subject to less competitive
to a more protracted slowdown in the United States and
pressure will persist for longer than expected. It is likely to be
Europe, but more significantly to the risk that the effects of
mid-2009 before we see the extent to which slower activity
slowing Western economies on Asia are more severe than
is translating into lower non-tradable inflation – later than
we have assumed.
previously thought.
We are now clearer about the transmission of these
Balancing the various risks around the outlook, we assess
developments to the New Zealand economy. In particular,
some further, but significantly smaller, reductions in interest
prices for a number of New Zealand’s commodity exports
rates may be warranted beyond the current policy decision.
have fallen significantly and are likely to fall further. New
The precise timing and magnitude of these reductions
Zealand-based banks and large firms are also finding it
will depend on the information we receive on activity and
difficult to access traditional overseas funding sources and/
inflation prospects over the coming months.
or are paying a higher margin for what they can obtain. Both
of these forces will act to lower growth and inflation.
Assessing the impact of global credit pressures and
the behaviour of financial institutions on the price and
availability of credit is a significant policy consideration. The
credit conditions faced by New Zealand households and
6
Reserve Bank of New Zealand: Monetary Policy Statement, December 2008
3
International developments and outlook
Following firm growth in 2007, economic activity in New
Figure 3.1
Zealand’s trading partner economies slowed over the first
International shock transmission
half of 2008. This was in response to significant financial
Financial disruption
rt
de
m
prices.
an
d
The contractionary impact of high commodity prices
Asia
d
on real incomes has now eased. However, this has been
an
em od
td
or omm s
p
Ex rd c rice
p
Ha
more than offset by the significant deterioration in financial
conditions, which has increasingly been spilling over into
weaker confidence and economic activity. Consequently, in
recent months there has been a pronounced deceleration in
ity
Australia
Ex
So
po
rt
co dem
pr mm an
ice o
d
s dit
y
ft
Export demand
Export demand
po
Cost/availability of credit
Ex
and pressure on real incomes due to high commodity
United
States
de
m
an
d
Europe
Ex
po
rt
headwinds, corrections in many overseas housing markets,
New
Zealand
Source: RBNZ.
economic activity in all regions.
In light of these developments, the outlook for growth in
Zealand’s total exports, slowing growth in China is expected
all of New Zealand’s trading partners is significantly weaker
to contribute to weaker commodity export prices and lower
than assumed at the time of the September Statement.
growth in Australia – New Zealand’s largest trading partner.
Growth is expected to slow sharply in all regions and to
Weaker global growth is also likely to result in some
recover only very gradually. This is despite the extraordinary
reduction in imported inflation pressures due to demand-
measures taken by policymakers to support growth and
related easing in commodity prices and increased price
promote the functioning of financial markets. Growth is
competition among producers. However, the precise nature
expected to be particularly weak in Western economies
of the pass-through to domestic prices will be influenced by
and in Japan, but is also expected to ease materially in New
the response of the New Zealand dollar.
Zealand’s main trading partners in Asia, excluding Japan
(AxJ).
The deteriorating outlook for activity in trading partner
economies since the September Statement is the key factor
contributing to a weaker outlook for growth and inflation in
New Zealand (some of the main transmission channels are
summarised in figure 3.1). As discussed in chapter 5, there
are likely to be significant trade-related spillovers. These
include reduced demand for New Zealand’s manufactured
and tourism exports, as well as lower international prices
for New Zealand’s commodity exports. It is also possible
that weaker international activity and challenging financial
conditions may reinforce each other and worsen already
tight domestic financial conditions.
While the direct trade spillovers to New Zealand from
weaker activity in some large economies may be limited,
slower activity in large economies can indirectly influence
New Zealand by affecting activity in other regions which
are important trading partners. For instance, although
exports to China account for only about 7 percent of New
International financial market
developments
Financial conditions have deteriorated significantly in recent
months and are likely to remain challenging for longer than
previously assumed. The direct impact of these developments
is expected to be centred on developed economies. Tight
credit conditions, as well as losses in financial and property
wealth, are now expected to exert a larger dampening impact
on business and household spending. Further, increased
uncertainty about the economic outlook signals additional
downside risk, particularly for business investment.
In Asia, financial institutions are thought to be
generally less exposed to recent events than their Western
counterparts. However, the region is still facing increased
financial headwinds, such as high levels of volatility in equity
prices. Of greater concern is Asia’s indirect exposure to
recent developments via reduced global activity and trade.
Reserve Bank of New Zealand: Monetary Policy Statement, December 2008
7
The recent intensification of financial market headwinds
followed the failure of major US investment bank Lehman
Brothers in mid-September. This led to a significant increase
in fears about the health of the global financial system, with
widespread concerns about the solvency of several major
US and European financial institutions. Moreover, with
the extreme uncertainty around the solvency of financial
institutions, their ability to raise capital has deteriorated
in recent surveys of financial institutions’ lending practices in
the United States and euro area.
Figure 3.3
Credit default swap spread indices
Basis points
400
350
350
300
300
250
markedly.
These developments have caused global equity markets
to fall sharply (figure 3.2), while measures of investor risk
aversion – such as the VIX index (options implied volatility on
the S&P 500 index) – surged to record highs. In response to
the sharp fall in equity markets and more general concerns
about the global financial system, policymakers have taken
economic activity. Despite these actions, equity markets have
fallen further in recent weeks as economic data continue to
highlight the possibility of a prolonged global recession.
150
100
50
VIX index
Sept MPS 90
80
DAX 30
100
80
FTSE 100
0
Jan 07 Apr 07 Jul 07 Oct 07 Jan 08 Apr 08 Jul 08 Oct 08
Source: Bloomberg, Reuters.
Note: Updated to 24 November 2008.
Short-term
money
market
conditions
0
also
deteriorated significantly after mid-September. Investors
became extremely cautious about lending to counterparties,
NZX 50
VIX Index (RHS)
50
Jan 07 Apr 07 Jul 07 Oct 07 Jan 08 Apr 08 Jul 08 Oct 08
Source: Bloomberg, RBNZ.
Note: Updated to 24 November 2008.
3.4).
Figure 3.4
70
Spreads between three-month Libor and OIS
60
rates
50
Basis points
400
40
70
60
50
Europe
index swap – OIS – rates) widened to record levels (figure
ASX 200
S&P 500
100
rates and expected policy rates (as measured by overnight
(1 January 2007 = 100)
90
150
Australasia
Accordingly, spreads between interbank (Libor and bank bill)
Equity indices
110
200
preferring to invest mainly in safer US government debt.
Figure 3.2
120
250
United States
200
aggressive actions to stabilise financial markets and bolster
Equity index
130
Basis points
400
Sept MPS
Basis points
Sept MPS 400
30
350
350
20
300
300
10
250
250
0
200
200
Developments since mid-September have resulted in a
significant increase in the cost of insuring against default
for corporate borrowers in most countries – an indication of
the upward pressure on term funding costs and the reduced
150
100
50
Euro area
United Kingdom
New Zealand
United States
Australia
150
100
50
0
0
Jan 07 Apr 07 Jul 07 Oct 07 Jan 08 Apr 08 Jul 08 Oct 08
Source: Bloomberg, RBNZ estimates.
Note: Updated to 24 November 2008. Bank bill rates are used
instead of Libor rates in the case of New Zealand and
Australia.
availability of such funding (figure 3.3). The increase in
funding costs has resulted in financial institutions reducing
the availability and increasing the cost of credit to households
and businesses. The tightening in credit conditions is evident
8
Reserve Bank of New Zealand: Monetary Policy Statement, December 2008
In response to money market pressures, the US
have taken since mid-2007. Although governments – in the
Federal Reserve and other central banks have continued to
United States, United Kingdom and euro area in particular
increase the range and size of their liquidity facilities. The
– have injected significant capital directly into financial
additional liquidity measures and some easing in investor
institutions, new capital raised has still fallen short of total
risk aversion have helped ease pressures in money markets,
credit write-downs by about USD100 billion over the past
although interest rate spreads still remain wide by historical
year.
standards.
Despite the recent easing in short-term money market
pressures, the ability of financial institutions to raise longerterm capital still remains extremely difficult. However,
recent government actions to implement wholesale deposit
guarantee schemes, particularly in the United States, United
Kingdom and euro area, are expected to assist financial
institutions in raising capital.
Figure 3.6
Credit write-downs and capital raised by region
since Q3 2007
US dollars (billion)
700
600
US dollars (billion)
700
Credit write-downs
Capital raised
500
600
500
400
400
300
300
with little new issuance during October, total outstanding
200
200
US dollar commercial paper declined significantly (figure
100
100
3.5). Not only were investors less willing to invest in the
0
Americas
Europe
Source: Bloomberg.
Note: Current as at 24 November 2008.
Conditions in the US dollar commercial paper (CP) market
also deteriorated significantly after mid-September. Indeed,
CP market, the cost of available funding also increased
significantly. More recently, implementation of the Federal
Asia
0
Reserve’s commercial paper funding facility has fostered
some recovery in issuance.
Policy responses
Figure 3.5
The marked deterioration in financial conditions and the
Total stock of outstanding US dollar commercial
corresponding concerns about economic activity have led to
paper
sharp falls in policy interest rates around the world. In early
US dollars (billion)
2500
US dollars (billion)
2500
October, several major central banks co-ordinated to reduce
interest rates by 50 basis points. Several other central banks
2000
Asset backed
Not asset backed
2000
1500
1500
1000
1000
500
500
also reduced interest rates around this time. More recently,
policy interest rates have continued to fall as the outlook
for global growth has deteriorated further and inflation
pressures have eased significantly (figure 3.7). Interest rate
markets are pricing in further aggressive near-term easing.
0
2001 2002 2003 2004 2005 2006 2007 2008
Source: US Federal Reserve, Bloomberg.
Note: Updated to 19 November 2008.
0
Since the beginning of the credit crisis in mid-2007 there
have been regional disparities in the extent of credit writedowns, with US financial institutions accounting for about 70
percent of total credit write-downs worldwide (figure 3.6).
However, increases in money market pressures have meant
that wholesale and retail interest rates have fallen by less
than policy rates.
Authorities in a number of countries have introduced
fiscal stimulus packages to support their domestic economies.
Among New Zealand’s key trading partners, such policies
have been introduced in Australia, the United Kingdom,
Germany, Japan, China, South Korea, Malaysia and Taiwan.
This, in part, underlies the different responses policymakers
Reserve Bank of New Zealand: Monetary Policy Statement, December 2008
9
Policymakers in the United States are also considering
The broad-based strength in the US dollar and Japanese
increasing fiscal support. For the most part, the impact of
yen masks what has been an extremely volatile period.
these policies is expected to be seen from 2009.
Notably, since mid-September measures of volatility on the
Australian dollar have exceeded those on the New Zealand
Figure 3.7
dollar (figure 3.9).
Financial market expectations of international
Figure 3.9
policy rates
Implied volatility on one-month currency options
%
8
%
Expectation 8
6
6
Australia
United Kingdom
4
4
%
45
%
45
40
40
35
35
30
30
EUR/USD
20
Euro area
2
United States
0
2004
2005
2
2007
20
NZD/USD
15
15
10
10
Japan
2006
25
25 AUD/USD
2008
2009
0
Source: Reuters, RBNZ estimates.
Note: Current as at 24 November 2008. Dashed lines as at
September Statement.
5
5
GBP/USD
0
1998
2000
2002
2004
Source: Bloomberg, RBNZ.
Note: Updated to 24 November 2008.
2006
2008
0
The New Zealand dollar has also depreciated against
the US dollar since the September Statement. This has been
Foreign exchange markets
driven by increased investor risk aversion, combined with
Since the September Statement the US dollar and Japanese
falling global commodity prices and expectations of greater
yen have appreciated against a broad range of currencies
policy rate easing from the Reserve Bank of New Zealand.
(figure 3.8). The US dollar has appreciated as extreme risk
Notably, the New Zealand dollar has depreciated sharply
aversion has caused investors to unwind riskier investments
against the Japanese yen as risk aversion and a narrowing
in favour of US dollar denominated safe-haven assets, such
in the relative interest rate differential has led to Japanese
as government bonds. Meanwhile, the Japanese yen has
investors scaling back positions. In particular, retail margin
appreciated as investors have repatriated money back to
traders in Japan have now reduced their net long positions
Japan and traders have unwound carry trades.
in the New Zealand dollar to levels prevailing before the
onset of the credit crisis in mid-2007. While total issuance
Figure 3.8
Change in currencies against the US dollar since
the September Statement
Japanese yen
Taiwan dollar
Singapore dollar
Swiss franc
Danish krone
Euro
Canadian dollar
British pound
Swedish krone
New Zealand dollar
Norwegian krone
South African rand
Australian dollar
Mexican peso
Brazilian real
South Korean won
Yellow bars indicate
TWI countries
-30
-20
-10
0
%
10
of Uridashi bonds has declined sharply, issuance of New
Zealand dollar denominated Uridashi bonds has remained
a reasonably large portion of overall global issuance (figure
3.10).
20
Source: Bloomberg, RBNZ.
Note: Current as at 24 November 2008.
10
Reserve Bank of New Zealand: Monetary Policy Statement, December 2008
Figure 3.10
Figure 3.11
Issuance of Uridashi bonds by currency
Yen (billion)
400
Trading partner GDP
Yen (billion)
NZD
AUD
USD
ZAR
Other
USD
400
(annual average percent change)
%
Projection
5
300
300
200
200
100
100
%
5
4
4
3
3
2
2
Source: Bloomberg, Reuters, RBNZ.
1
1
International activity
0
0
Apr 04
0
Apr 05
Apr 06
Apr 07
Apr 08
The global economy appears to be entering a position of
extreme weakness. Economic activity in New Zealand’s
1995
1997
1999
2001
2003
2005
2007
2009
0
Source: DataStream, RBNZ estimates.
Note: The GDP measure shown is an export-weighted average of
GDP growth in New Zealand’s 12 major trading partners.
trading partner economies had already begun to slow in the
first half of 2008. With the significant increases in financial
• The outlook for household spending in these economies
headwinds discussed above, a further sharp deceleration in
has continued to weaken as a result of softening labour
growth is projected over the remainder of 2008 and early
markets, tighter lending conditions, and very weak
2009 (figure 3.11, table 3.1). Further ahead, growth is
consumer confidence. In some economies, such as the
expected to recover only gradually, remaining below trend
United States and the United Kingdom, continuing
through 2010. This outlook is much weaker than we had
corrections in housing markets are also expected to
assumed at the time of the September Statement, with
dampen household spending for some time.
global growth now expected to fall to its lowest rate since
• These conditions, as well as the worsening export picture,
have also significantly affected business activity (figure
the early 1980s.
The outlook for activity is particularly weak in developed
3.12) and are expected to result in firms cancelling or
economies (figure 3.13). The September quarter saw GDP
delaying investment spending.
contracting in the United States, Japan, United Kingdom
In AxJ, both financial and non-financial institutions still
and the euro area. Growth in these economies is expected
appear less directly exposed to the financial crisis than their
to remain negative through the first half of 2009 and to
counterparts in Western economies. Nevertheless, softer
recover only gradually further ahead.
global demand conditions are now more clearly weighing
Table 3.1
Forecasts of trading partner GDP
(calendar year, annual average percent change)
Country
Australia
Asia ex-Japan*
United States
Japan
Euro area
United Kingdom
12 Country Index
2003
3.0
5.3
2.5
1.5
0.8
2.8
2.8
2004
3.9
7.6
3.6
2.7
1.9
2.8
4.1
2005
2.8
6.8
2.9
1.9
1.8
2.1
3.3
2006
2.7
7.5
2.8
2.4
3.0
2.8
3.7
2007
4.2
7.7
2.0
2.0
3.0
3.0
4.0
2008f
2.3
5.7
1.5
0.5
1.3
0.8
2.4
2009f
1.6
4.0
-0.7
-0.2
-0.5
-1.3
1.1
Source: DataStream, RBNZ estimates.
*
Includes China, Hong Kong, Malaysia, Singapore, South Korea and Taiwan.
Reserve Bank of New Zealand: Monetary Policy Statement, December 2008
11
Figure 3.12
Trading partner GDP and business activity indicators
United States
Euro area
Annual percent change
6
Standard deviations
3
5
4
3
2
1
4
1
-2
0
ISM - Manufacturing
Consumer confidence
GDP (LHS)
-1
-2
-3
5
-1
1
1995
1997
1999
2001
2003
2005
2007
-2
-5
-3
1
3
2
1
0
1999
2001
2003
2005
2007
1999
2001
2003
2005
2007
-5
Annual percent change
6
Standard deviations
3
5
2
4
1
3
-1
1
-1
-2
0
-2
-1
-2
-4
-3
-5
-4
PMI
Consumer confidence
GDP (LHS)
1995
1997
1999
2001
2003
2005
2007
-3
-4
-5
China
2
5
1
4
0
3
-1
2
PMI
Consumer confidence
GDP (LHS)
1
1997
1997
0
Standard deviations
3
6
1995
1995
-4
2
Australia
Annual percent change
7
0
-3
PMI
Consumer confidence
GDP (LHS)
0
-3
PMI
Consumer confidence
GDP (LHS)
1997
-2
0
-4
2
1995
-1
1
Japan
4
-3
0
2
-1
Standard deviations
3
5
-2
3
-3
United Kingdom
Annual percent change
6
-1
Standard deviations
3
2
0
2
Annual percent change
6
1999
2001
2003
2005
2007
-2
-3
Annual percent change
15
Standard deviations
3
14
2
13
1
12
0
11
-1
9
-2
8
7
PMI
GDP (LHS)
6
5
2000 2001 2002 2003 2004 2005 2006 2007 2008
-3
-4
-5
Source: DataStream, national sources, RBNZ estimates.
Note: GDP data are shown in annual percent change form. Other series are indices that have been rescaled to indicate their deviation
from sample averages.
upon activity, and growth is expected to slow sharply from
business activity such as industrial production. However,
the strong rates seen in early 2008.
indicators of domestic demand such as retail sales have
• In China, GDP growth has continued to slow from the
remained resilient. Very recently, the Chinese authorities
double-digit growth rates seen in 2007, to 9 percent in
announced new spending measures and a 108 basis-
the year to September. This slowing reflects earlier policy
point cut in the monetary policy rate to stimulate the
tightening and less favourable global conditions, and
economy.
has been reflected in China’s exports and indicators of
12
Reserve Bank of New Zealand: Monetary Policy Statement, December 2008
Figure 3.13
• Consumption spending has weakened significantly in
Trading partner GDP by region
the wake of strong inflation pressures and the earlier
(annual average percent change)
tightening of monetary policy. With strong financial
%
Projection
10
%
10
headwinds
(including
reduced
financial
wealth),
combined with low levels of confidence, household
8
8
6
6
4
4
2
2
growth.
0
The outlook for global growth is much more uncertain
-2
than usual and the risks are, on balance, to the downside.
0
Western economies + Japan
AxJ
Australia
-2
-4
-4
1995 1997 1999 2001 2003 2005 2007 2009
Source: DataStream, RBNZ estimates.
Note: Western economies includes the United States, United
Kingdom and euro area economies.
• Slowing activity has also been evident in New Zealand’s
smaller trading partners in Asia. Household spending
and business sector activity have moderated across
the region, and export activity has slowed. Particular
weakness has been seen in Singapore, Taiwan and Hong
Kong, where activity is closely linked to conditions in
Western economies.
• GDP growth in all major trading partners in AxJ is expected
spending looks likely to remain soft for some time.
• Indicators of business sector activity, such as the NAB
business survey, are also consistent with softening
In large part these risks relate to the persistence of financial
headwinds, particularly given the potential for slowing
activity and adverse financial conditions to reinforce each
other. There is also a high degree of uncertainty regarding
the resilience of economies in AxJ (particularly China) to
recent developments. These downside risks are partially
offset by the significant easing in monetary and fiscal policy
discussed above.
Our projections are broadly in line with the latest
forecasts published by the IMF and OECD, and with the
most recent Consensus survey.
to slow sharply, due primarily to the deterioration in
the outlook for Western economies and the resulting
weaker environment for international trade. These
International inflation
conditions are also expected to contribute to a further
developments and outlook
slowing in employment and business investment across
In most of New Zealand’s trading partner economies, the
AxJ. The eventual recovery in activity in AxJ is expected
strong increases in inflation seen over the past year have
to be quite gradual, consistent with the protracted
now started to reverse (figure 3.14). This is mainly a result
recoveries in other regions and the related weakness in
of recent sharp falls in commodity prices, particularly for
export demand.
food and energy – the same factors that contributed to
• Although developments in financial markets have not
high inflation earlier in the year. Measures of core inflation
been centred on AxJ, financial headwinds (such as the
rates have also softened in many economies, but to a lesser
high levels of volatility in equity prices) are still likely to
extent.
dampen activity in the region.
Contributing to the recent declines in commodity prices
A marked deceleration in Australian growth is expected.
have been concerns about the strength of global demand
• Slowing activity in Australia’s main trading partners
and the possible impact of the credit crisis on emerging
(especially China) has contributed to a sharp decline in
markets. These concerns have contributed to particularly
commodity prices, with further falls expected. As well
sharp falls in the price of oil, with the West Texas Intermediate
as dampening exporters’ incomes, this is expected to
oil price down by more than 60 percent from its July peak,
lead to weaker investment spending, both in the mining
to under USD50 per barrel – roughly where it was in early
sector and more generally.
2007 (figure 3.15).
Reserve Bank of New Zealand: Monetary Policy Statement, December 2008
13
Figure 3.14
Figure 3.16
Headline inflation in selected trading partner
Nominal commodity prices
economies
(index=100 in July 1986)
(annual)
%
8
%
8
Index
180
World commodity
price index
Index
180
160
6
Australia
6
United States
140
4
4
2
2
160
NZ dollar commodity
price index
140
120
Euro
area
0
120
100
United Kingdom
100
World commodity
price index (ex-dairy)
0
80
-2
1995 1997 1999 2001
Source: National sources.
2003
2005
-2
2007
1995 1997 1999 2001 2003 2005 2007
Source: ANZ National Bank Group Ltd, RBNZ estimates.
80
largest export commodities. Prices of base metals have also
Figure 3.15
continued to fall.
West Texas Intermediate oil price
USD/barrel
160
USD/barrel
160
Recent declines in commodity prices are expected to
contribute to a sharp decline in inflation in New Zealand’s
trading partner economies over the first half of 2009 (figure
120
120
80
80
40
40
0
0
3.17). Looking further ahead, global inflation is expected to
be more modest than assumed at the time of the September
Statement, as weaker global activity contributes to an
easing in cyclical pressures. Declines in commodity prices
1998
2000
2002
2004
Source: Bloomberg, DataStream.
Note: Updated to 24 November 2008.
2006
2008
are expected to alleviate pressures on households’ real
disposable incomes in most trading partner economies.
Figure 3.17
Trading partner consumer prices
(annual percent change)
Weaker global activity has also contributed to sharp
declines in the international prices for New Zealand
commodity exports. By October, ANZ commodity prices
%
5
Projection
%
5
4
4
3
3
2
2
1
1
had fallen 12 percent (in SDR terms) from their July peak
(figure 3.16). This is primarily due to dairy prices declining 23
percent over this period. Since then, USDA Oceania whole
milk powder prices have continued to fall rapidly; by late
November they had halved in US dollar terms since their
peak, which was reached late last year. Prices of a number
of other commodity exports have also declined, including
manufactured beef, forestry products and aluminium.
Declines have also been seen in the prices of hard
commodities, including those which are important exports
0
0
1995 1997 1999 2001 2003 2005 2007 2009
Source: DataStream, Consensus Economics Inc., RBNZ
estimates.
Note: The consumer prices measure shown is an importweighted average of CPI inflation in New Zealand’s 12
major trading partners.
for Australia. There have been particularly sharp declines
in the spot prices for coal and iron ore, two of Australia’s
14
Reserve Bank of New Zealand: Monetary Policy Statement, December 2008
4
Recent developments in the domestic economy
Overview
Figure 4.1
Against the backdrop of a deteriorating global economy and
Spread between 90-day bank bill rate and three-
broad-based weakness across most sectors of the domestic
month OIS rate
economy, we estimate that GDP contracted over the first
%
10
Basis points
140
three quarters of this year.
The deterioration in the household sector continues
to drive the weakness in near-term domestic activity, as
120
9
100
3-month bank bill rate
8
slowing in the housing market and tightening credit
conditions. In addition, increasing evidence suggests
businesses are also suffering from the slowdown, with
business sentiment falling to low levels recently.
In line with the increased volatility in oil prices, headline
inflation has also undergone large movements in the second
half of 2008. While annual headline inflation peaked at 5.1
percent in the September quarter, sharp declines in petrol
prices since the peaks reached in July will drive December
quarter inflation significantly lower than previously forecast.
7
80
Spread (RHS)
consumers rein in their spending in the face of continued
60
3-month OIS rate
40
6
20
5
Jan 06 Jul 06 Jan 07 Jul 07 Jan 08
Source: Reuters.
Note: Updated to 24 November 2008.
Jul 08
0
other developed economies, the improvement has been
largely in the overnight duration, with conditions beyond
three months – where banks do the majority of their funding
– still under considerable pressure.
The ongoing turmoil in global financial markets (discussed
in chapter 3) and the continuing domestic economic
Financial market developments
weakness has seen domestic markets price in further
Worsening global financial market developments since mid-
significant reductions in the OCR. New Zealand’s wholesale
September have contributed to a deterioration in short-
interest rates have fallen across the curve, with shorter-
term domestic money market conditions. As has occurred
term interest rates falling by a greater extent, reflecting the
internationally, this tightening in credit conditions saw the
extensive easing expected in the near term (figure 4.2). That
spread between bank bill rates and the expected Official
said, the New Zealand yield curve has steepened relatively
Cash Rate (as measured by overnight index swap – OIS –
less than in other developed economies.
rates) in New Zealand widen to historically high levels (figure
4.1).
Recently announced policy measures have contributed
to some improvement in local money market conditions.
The implementation of the retail deposit guarantee scheme,
the announcement of a wholesale guarantee facility, and
measures by the Reserve Bank of New Zealand to improve
liquidity – in particular the term auction facility (TAF) – have
helped to ease local money market pressures.
This easing in money market conditions has seen the
spread between bank bill rates and the expected Official
Cash Rate (OCR) fall back to around 25 basis points above
normal levels. In contrast, the spreads in some major
Figure 4.2
Wholesale interest rate curve
Basis points
50
0
Following
September MPS
%
8.0
Net change
(LHS)
7.5
-50
7.0
-100
6.5
-150
6.0
-200
-250
5.5
Current
90d 180d 1yr
2yr
3yr
4yr
5yr
7yr
10yr
5.0
Source: Bloomberg.
Note: Current as at 24 November 2008.
economies have remained around 150 basis points above
average levels (figure 3.4, chapter 3). However, similar to
Reserve Bank of New Zealand: Monetary Policy Statement, December 2008
15
Household sector
Figure 4.4
Recent falls in wholesale interest rates have resulted in
OCR and the effective mortgage rate
markedly lower mortgage interest rates offered to new
borrowers and those households facing re-pricing of existing
%
10
Projection
Sept
MPS
9
9
Effective mortgage rate
debt (figure 4.3).
8
Figure 4.3
8
Central
7
Mortgage interest rates offered to new
OCR
6
borrowers
%
12
%
12
11
11
10
%
10
10
Floating
9
9
8
8
7
6
5
5
4
4
1999
2001
2003
2005
2007
2009
Source: RBNZ.
Note: Central projection as at 24 November 2008.
in retail sales volumes in the September quarter, particularly
in the vehicle and grocery sectors.
7
7
2-year fixed
6
1995 1997 1999 2001 2003 2005 2007
Source: RBNZ.
Note: November data are provisional estimates.
6
Given the recent improvement in credit conditions and
Residential investment declined by a further 8.3 percent
in the June quarter (figure 4.5). Furthermore, house sales
remained at low levels throughout the September quarter,
and issuance of residential building consents fell further.
Low housing market activity and a large number of house
listings have put downward pressure on overvalued house
expectations of further easing in the OCR, we believe the
prices.
effective mortgage rate – the average interest rate paid on
Figure 4.5
outstanding mortgage debt – has now peaked. Overall, the
Real residential investment, house sales and
effective mortgage rate is expected to decline by about 150
ex-apartment consents
basis points over the next two years, as the mortgages that
%of GDP
6.5
were fixed over the past two years are reset at lower rates
(figure 4.4). Moreover, the relatively larger fall in shorterterm interest rates, and expectations among borrowers of
6.0
Per thousand working aged persons
4.0
Residential
investment
3.5
3.0
5.5
further falls in interest rates over the months ahead, mean
new borrowers and those facing re-pricing are increasingly
choosing to take out short-term fixed or floating rate
mortgages. If this pattern continues, it will speed up the
transmission from changes in the OCR to the interest rate
paid by households. But while mortgage rates have fallen,
Ex-apartment
consents (scaled)
5.0
4.5
REINZ house sales
(adv 6 months, RHS)
4.0
2000
2002
2004
2006
2008
Source: REINZ, Statistics New Zealand, RBNZ estimates.
2.5
2.0
1.5
1.0
these lower rates tend to be available only for borrowers
Consumer confidence showed initial signs of rebounding
with loan-to-value ratios of less than 80 percent, with more
from its mid-year lows (figure 4.6), following falls in petrol
leveraged households finding financing difficult or more
prices, the October tax cuts, and lower mortgage rates for
expensive.
new loans. Nonetheless, recent financial market turmoil also
The combination of declining household wealth, rising
appears to have weighed on consumer confidence and it
effective mortgage rates, and significantly higher food and
remains well below 2007 levels. This suggests continued
fuel costs over the course of 2008 contributed to weaker
weakness in household spending through to at least the end
household spending. This has been reflected in the decline
of this year.
16
Reserve Bank of New Zealand: Monetary Policy Statement, December 2008
Figure 4.6
increasingly being affected by the slowdown. The marked
Real retail sales growth and consumer
deterioration in global funding and credit markets since
confidence
mid-September has pushed up credit spreads faced by
Annual %
10
Index
140
8
Real retail sales
Roy Morgan
consumer confidence
(adv 2 months, RHS) 130
6
0
-2
rate paid on new corporate paper issued and bank bill yields
has begun to widen again (after narrowing following the
110
bailout of Bear Stearns in mid-March) and investor demand
100
Westpac consumer
confidence
(adv 1 quarter, RHS)
commercial paper market, where the spread between the
120
4
2
local corporate borrowers. This is illustrated by the local
90
-4
80
1998
2000
2002
2004
2006
2008
Source: Statistics New Zealand, Roy Morgan, Westpac McDermott
Miller.
Reflecting this weaker household spending, growth in
has weakened (figure 4.8).
Figure 4.8
Spread between commercial paper and bank bill
rates
Basis points
60
50
Ratio
7
6
Average bid-cover ratio (RHS)
40
5
2007 (figure 4.7). Similarly, credit growth to the non-
30
4
agricultural business sector has also continued to trend
20
3
downwards, partly reflecting the tightening in lending
10
standards by banks and difficulties in the finance company
0
credit to the household sector has declined sharply since
sector. Meanwhile, the strength in international prices for
agricultural products early this year has driven strong credit
growth to the agricultural sector, notably to dairy farmers.
-10
2002 2003 2004 2005 2006
Source: Reuters, RBNZ.
Note: Updated to the end of October.
2007
profitability expectations, and subsequent investment and
(annual percent change)
%
25
%
25
Non-agricultural business
20
Agricultural
hiring intentions have continued to fall to multi-year lows.
This is reflected in headline measures of businesses’ outlook
for their own activity (figure 4.9).
15
Figure 4.9
10
10
Business outlook for own activity
5
5
Index
75
0
0
Household
NBBO own activity
1998
2000
Source: RBNZ.
2002
2004
2006
2008
Index
60
40
50
-5
0
2008
deterioration in domestic demand, measures of business
Credit by sector
15
1
A1+ rated issuance
With reduced credit availability exacerbating the
Figure 4.7
20
2
A2 rated issuance
-5
20
25
0
0
Business sector
While the current recession in the domestic economy
stemmed from the household sector, businesses are also
-20
QSBO domestic trading activity (RHS)
-25
-40
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
Source: NZIER, ANZ National Bank Group Ltd, RBNZ
estimates.
Reserve Bank of New Zealand: Monetary Policy Statement, December 2008
17
Tradable sector
Although import volumes increased sharply in the June
Beyond the direct impact of tightening credit conditions
quarter, an oil rig and a floating platform purchased in April
mentioned above, New Zealand is also affected indirectly
explained this temporary spike. Abstracting from irregular
by the weakening world demand discussed in chapter 3. To
items, underlying import volumes appear to have fallen
date, the domestic effects have mainly been concentrated in
during the September quarter.
the prices of exports and imports as international commodity
Nonetheless, the rise in imports in the June quarter
prices fell markedly. Since agricultural goods are a larger
contributed to a widening in the annual current account
share of exports than oil is of imports, these commodity
deficit to 8.3 percent of GDP, reversing the improvement
price movements have seen a substantial fall in the terms
over the previous quarters (figure 4.11). In a levels sense,
of trade – the ratio of export prices to import prices. This
a large investment income deficit continues to account for
change in the terms of trade has dragged on incomes over
the bulk of New Zealand’s current account deficit. The fact
the latter half of 2008.
New Zealand continues to run a large current account deficit
The effects of the weaker global economy are likely to
affect export volumes over the course of 2009, as discussed
in chapter 5. But exports were also influenced in early 2008
by domestic factors. While exporters benefited from the
then-high international prices, agricultural export volumes
were heavily affected by dry weather over this period. Milk
production fell, but meat exports rose as farmers increased
slaughter in light of feed shortages. Recovery to more normal
levels following the drought has boosted dairy exports
through the latter half of 2008. Conversely, the need to
rebuild stock numbers and the continued impact of dairy
conversions is likely to depress the volume of meat exports
highlights its dependence on international funding.
Figure 4.11
Current account balance, investment income,
goods and services balances
%of GDP
6
%of GDP
6
4
2
2
0
0
-2
-2
Services balance
-4
-4
-6
-6
Current account
balance
-8
was offset by increased manufacturing exports. Meanwhile,
Investment income
balance
-10
1995 1997 1999 2001
exports of services have remained relatively flat since the
Source: Statistics New Zealand.
for some time. The fall in primary exports in the June quarter
4
Goods balance
2003
2005
-8
2007
-10
start of the decade, reflecting the strong New Zealand dollar
over much of this period and, more recently, the weaker
world economy (figure 4.10).
Output
The backdrop of a deteriorating global economy and
Figure 4.10
growing weakness in the household and business sectors
Export volumes
95/96 $billion
6
95/96 $billion
3.0
has driven the fall in domestic output over 2008. As a result
of low activity in the real estate market, service sector output
contracted in the June quarter for the first time since 2001.
5
2.5
Manufactured
exports (RHS)
that the domestic economy is likely to have had a third
Primary exports
4
3
2.0
18
quarter of contraction for September.
The contraction in output has been reinforced by a
weaker world growth outlook, which adversely affects
Exports of services
(RHS)
1995 1997 1999 2001 2003 2005
Source: Statistics New Zealand, RBNZ estimates.
The sharp decline in residential construction activity suggests
2007
1.5
export sector incomes by reducing export volumes and
Reserve Bank of New Zealand: Monetary Policy Statement, December 2008
export commodity prices. Offsetting some of this will be the
are typically one of the last indicators to turn in response to
recovery in the agricultural sector from the drought.
softer labour market conditions, this latest outturn reflects
The dry conditions also negatively affected electricity
generation early this year. Since then, increased hydroelectricity generation from the substantial rainfall will also
offset some of the weakness in other domestic production.
the extremely tight labour market prevailing in recent years.
Figure 4.13
Labour costs and wages – private sector
(annual percent change)
%
4.5
4.0
Productive capacity and the labour
%
9
QES total weekly
gross earnings (RHS)
8
7
3.5
market
6
3.0
On balance, recent developments have led to an increase
in unused productive capacity in the economy following a
sustained period during which resources have been severely
stretched. The QSBO measure of capacity utilisation – which
has in the past been a useful indicator of capacity pressures
in the economy – fell sharply in the September quarter
5
2.5
4
2.0
3
LCI wage index
1.5
2
1.0
1995 1997 1999 2001
Source: Statistics New Zealand.
2003
2005
2007
1
(figure 4.12). In addition, there have been signs of emerging
weakness in the labour market, with the unemployment rate
edging up for the third consecutive quarter and surveyed
Inflation expectations
skill shortages declining significantly from the peaks reached
The RBNZ two-year ahead measure of inflation expectations
early this year.
declined from a record high of 3.0 percent in the September
quarter to 2.7 percent in the December quarter (figure
4.14). This outturn was largely driven by a sharp decline in
Figure 4.12
inflation expectations of respondents in the financial sector.
Capacity measures and annual average GDP
However, it appears weak demand in the domestic economy
growth
is affecting a broader range of businesses, with pricing
(seasonally adjusted)
Normalised
3
%
8
2
greater extent than costs in recent months.
Capacity utilisation 6
1
0
intentions of respondents to the QSBO survey falling to a
4
Skill
shortages
Figure 4.14
2
Headline CPI and inflation expectations
0
%
6
%
6
-3
-2
5
5
-4
-4
4
-1
-2
GDP (RHS)
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
Source: Statistics New Zealand, NZIER, RBNZ estimates.
While the labour market is beginning to show signs of
weakening, this is yet to be reflected in wages, with the
Two-year ahead
3
3
2
2
private sector Labour Cost Index increasing by 3.7 percent in
1
the year to September – the highest rate of increase in the
0
history of the series (figure 4.13). Thus, nominal household
4
Headline CPI
inflation
1995
1997
Source: RBNZ.
Mean +/- standard
deviation
1999
2001
2003
1
2005
2007
0
income growth is still currently very strong. Given wages
Reserve Bank of New Zealand: Monetary Policy Statement, December 2008
19
Inflation
In contrast, non-tradable inflation remained high at an
Annual inflation increased to a record high of 5.1 percent
annual rate of 4.1 percent, reflecting the fact the domestic
in the September quarter, underpinned by high petrol and
economy has run beyond capacity for a number of years.
food price inflation. Increased energy costs also contributed
The easing in construction cost inflation has been limited by
to a sharp rise in producer price inflation over the past year.
the continued high costs faced by producers in the industry,
Intense cost pressures over the past year, combined with
despite slowing demand for building work. Outside of
relatively smaller increases in output prices and consumer
housing, recent increases in electricity prices and the annual
prices, point to margin compression over this period (figure
increase in local authority rates across the country will also
4.15). More recently, there have been very large declines in
underpin annual non-tradable inflation in the second half of
petrol prices from their peak in July, which will drive quarterly
2008. Thus, while weaker demand in the domestic economy
headline consumer price inflation negative in the December
has started to weigh on inflation pressures, a range of cost
quarter.
increases are continuing to underpin price increases in some
Lower import commodity prices and the lagged indirect
effects of the lower petrol prices are helping drive tradable
inflation lower, despite the depreciation in the New Zealand
dollar. There are also signs food price inflation is starting to
moderate (albeit from very high rates). Meanwhile, weaker
consumer spending has led to discounting of large ticket
consumer goods, a prime example being the recent sharp
decline in the price of second-hand vehicles.
Figure 4.16
CPI tradable and non-tradable inflation
(annual)
%
8
6
%
8
Non-tradable
4
Figure 4.15
Producer price inflation and headline CPI
(annual)
%
15
%
15
PPI inputs
Headline CPI
6
4
CPI
2
2
0
0
Tradable
-2
-4
10
10
5
areas in the near-term.
1995 1997 1999 2001
Source: Statistics New Zealand.
2003
2005
-2
2007
-4
5
0
0
PPI outputs
-5
1995
1997
1999
2001
Source: Statistics New Zealand.
20
2003
2005
2007
-5
Reserve Bank of New Zealand: Monetary Policy Statement, December 2008
Reserve Bank of New Zealand: Monetary Policy Statement, December 2008
21
2.4
2.1
2.1
4.3
Jun
2.8
2.4
2.9
2.7
2.8
3.2
Mar
Other inflation measures
Factor model estimate of core CPI inflation
CPI trimmed mean (of annual price change)
CPI weighted median (of annual price change)
CPI ex food, petrol and government charges
CPI ex food and energy
GDP deflator (derived from expenditure data)
2.5
2.4
3.1
AON Economist survey – inflation four-years-ahead
NBBO – inflation one-year-ahead (quarterly average)
3.2
2.7
2.4
AON Economist survey – inflation one-year-ahead
2.7
2.6
2.7
2.6
Inflation expectation measures
RBNZ Survey of Expectations – inflation one-year-ahead
RBNZ Survey of Expectations – inflation two-years-ahead
2.7
2.0
4.1
4.7
3.9
-0.5
-8.4
4.1
4.7
3.8
0.9
-2.8
CPI components
CPI non-tradables
Non-tradables housing components
Non-tradables ex housing, cigarettes and tobacco components
CPI tradables
Petrol
2.0
Jun
2.5
Mar
CPI
(annual)
Measures of inflation and inflation expectations
Table 4.1
2007
2007
3.2
2.5
2.5
2.7
2.6
Sep
2.7
1.9
1.8
3.8
2.5
2.3
3.7
4.9
3.1
-0.3
-5.9
1.8
Sep
3.1
2.6
2.8
3.0
2.7
Dec
3.2
2.0
1.8
5.6
2.8
3.5
3.5
4.9
3.0
2.8
16.9
3.2
Dec
3.3
2.6
3.1
3.0
2.7
Mar
3.2
1.9
1.6
5.8
2.9
3.5
3.5
4.6
3.1
3.4
20.5
3.4
Mar
3.4
2.6
3.1
3.3
2.9
Jun
3.4
1.9
1.5
3.7
3.0
3.8
3.4
4.0
3.1
4.8
25.9
4.0
Jun
2008
2008
3.7
2.7
3.5
3.6
3.0
Sep
3.7
2.2
2.1
n/a
3.1
4.0
4.1
3.2
4.5
6.3
29.3
5.1
Sep
n/a
2.7
3.0
2.8
2.7
Dec
5
The macroeconomic outlook
The outlook for economic activity in New Zealand remains
growth is also expected to see world prices for manufactured
weak. Global developments of the past two months have
exports ease over the projection.
seen the outlook for domestic activity deteriorate to an
In aggregate, we expect export prices to fall markedly
even greater extent than was projected in the September
through the first half of 2009. While there is a risk of even
Statement. The outlook for trading partner growth has been
larger falls in the near-term, we believe fundamentals remain
revised significantly lower, turbulence on global financial
in place to see commodity prices trend higher over the
markets has seen credit conditions tighten even further, and
medium term. We therefore project export prices to recover
international dairy prices have fallen sharply.
from the second half of 2010 (figure 5.1).
Weak GDP growth in New Zealand is projected to
continue through to the second half of 2009. Beyond this
– assuming some normalisation in credit markets – the
economy is expected to recover somewhat, as the impact of
a weaker currency boosts net exports and easier monetary
Figure 5.1
OTI world export prices (goods)
(seasonally adjusted)
Index
800
Projection
Index
800
and fiscal conditions assist economic activity more generally.
750
750
For now though, any sort of recovery remains some time
700
700
off, with the timing and magnitude of an upturn highly
650
650
dependent on global developments over coming months
600
600
550
550
500
500
and quarters.
More immediately, significant spare capacity is expected
to accumulate over the coming year. Surplus productive
resources, along with falling petrol prices, are expected
to contribute to a significant easing in inflation pressures.
450
2000
2002
2004
2006
2008
Source: Statistics New Zealand, RBNZ estimates.
2010
450
Indeed, excluding the impact of the Emissions Trading
Oil prices have also fallen sharply. While we expected oil
Scheme, annual CPI inflation is expected to be about 2.3
prices to moderate, recent declines have been much larger
percent by mid-2010.
than was assumed in the September Statement, consistent
with a further weakening in the global activity outlook. We
The terms of trade
assume that oil prices will largely track sideways from here
As discussed in chapter 3, the outlook for global growth has
(figure 5.2). There is clearly a risk of a more protracted cycle
deteriorated markedly over the past few months. An obvious,
in oil prices than we project.
and quite immediate, consequence of this deterioration has
been a sharp decline in global commodity prices.
Figure 5.2
International dairy prices have fallen markedly. We
expect prices to continue to decline and for this to be
reflected reasonably quickly in aggregate export prices. Of
course, given current downward momentum in commodity
prices, there is a clear risk of international dairy prices falling
Dubai oil price
USD/barrel
140
120
120
100
Sept
MPS
80
to an even greater extent.
The outlook for export commodity prices, more broadly,
60
has worsened. Meat prices, after showing strong gains,
40
have moderated. Forestry prices seem likely to continue to
20
moderate given the weak outlook for housing construction
0
in many of New Zealand’s export partners. Weak global
22
USD/barrel
140
Projection
100
80
60
Central
40
20
2000
2002
2004
2006
2008
2010
0
Source: Statistics New Zealand, RBNZ estimates.
Reserve Bank of New Zealand: Monetary Policy Statement, December 2008
Commodity products make up a much smaller proportion
Figure 5.4
of New Zealand’s import basket than its exports. As such,
Nominal TWI assumption
the recent commodity price declines are expected to have a
Index
75
Projection
comparatively smaller impact on import prices. In fact, once
Index
75
70
70
65
65
60
60
55
55
Beyond this, the terms of trade are expected to settle at a
50
50
level slightly above their average of the past decade (figure
45
oil prices are excluded, import prices are expected to trend
higher, consistent with continued positive world inflation.
Overall, sharply lower export commodity prices are
expected to outweigh the recent oil price decline such that
the terms of trade decline sharply over the coming year.
5.3).
Figure 5.3
2006
2008
2010
45
Trade volumes
OTI terms of trade (goods)
Index
1250
2000
2002
2004
Source: RBNZ estimates.
Projection
Index
1250
Weak global growth is expected to significantly depress
export activity. In particular, rising unemployment and
1200
1200
declining asset values internationally are expected to see
1150
1150
the number of tourists travelling to New Zealand decline
1100
1100
further over the coming year, despite the lower New Zealand
1050
1050
dollar.
1000
1000
950
950
900
2000
2002
2004
2006
2008
2010
900
Source: Statistics New Zealand, RBNZ estimates.
The near-term outlook for merchandise exports is less
clear. Assuming the weather remains favourable, dairy
export volumes are likely to continue to recover from last
season’s drought-inhibited levels. However, meat export
volumes are expected to decline as farmers look to rebuild
depleted breeding stocks. Furthermore, forestry export
Exchange rate
volumes are likely to continue to be inhibited by weak
The New Zealand dollar TWI has fallen sharply over the past
housing construction in most countries.
few months. The TWI is assumed to depreciate further over
Further out in the projection, export activity is expected
the coming year, before recovering gradually towards the
to recover (figure 5.5). Most importantly, the lower New
end of the projection (figure 5.4). As with export prices, there
Zealand dollar is expected to boost exports, particularly
is a risk that the New Zealand dollar depreciates further in
exports of services. In addition, meat export volumes are
the near term. The depreciating New Zealand dollar will help
likely to improve as breeding stock levels recover.
offset some of the effect of falling international commodities
prices on New Zealand dollar prices.
Import volumes are forecast to continue to decline as
a share of total output throughout the projection. Recent
depreciation in the New Zealand dollar is likely to see import
prices increase soon. This will further exacerbate the negative
impact on import volumes of projected weak household
spending, especially on motor vehicles and overseas
holidays. Moreover, wholesale and retail stock levels appear
quite high at present, reducing the need for importing new
product in the short term.
Reserve Bank of New Zealand: Monetary Policy Statement, December 2008
23
Figure 5.5
The current account
Total export volumes
The projected recovery in net export volumes is expected to
(percent of trend output and annual average
offset the forecast moderation in the terms of trade, such
percentage change)
that the trade balance is expected to improve modestly over
%
35
%share (LHS)
Projection
%
10
8
34
the projection and drive a recovery in the current account
balance (figure 5.7). Also of some assistance, the investment
income deficit is expected to narrow modestly from late
6
33
32
31
4
owners.
2
Figure 5.7
0
Current account, trade, and investment income
AAPC (RHS)
30
2000
2002
2004
2006
2008
Source: Statistics New Zealand, RBNZ estimates.
2010
2009 due to lower domestic profits being paid to foreign
-2
balances
(annual, percent of GDP)
%of GDP
6
Goods &
Services
%of GDP
6
Projection
4
Finally, we expect businesses to significantly reduce
4
their investment spending over the coming year. Investment
2
2
spending has a large import component, with the impact on
0
0
import volumes particularly noticeable.
-2
In all, the import penetration ratio is forecast to decline
-4
by 4 percentage points in the year to the middle of 2009,
-6
and show no recovery in the foreseeable future (figure 5.6).
-8
This compares to a trend gain of 1 percentage point per
-10
annum for the past two decades.
-2
Current account
-4
-6
Investment
income
2000
2002
2004
2006
2008
Source: Statistics New Zealand, RBNZ estimates.
-8
2010
-10
Figure 5.6
Import volumes
The labour market
(% of GDP, seasonally adjusted)
%of GDP
42
%of GDP
42
Projection
Declining activity through 2008 has been matched by a
sharp slowing in employment growth. Looking forward, in
40
40
line with extremely weak employment intentions and our
38
38
view that economic growth will remain very weak, we expect
36
36
employment to decline over the coming year and show only
34
34
32
32
30
30
28
28
2000
2002
2004
2006
2008
Source: Statistics New Zealand, RBNZ estimates.
2010
sluggish growth thereafter (figure 5.8).
The current low level of unemployment, along with quite
muted net immigration going forward, means that the peak
in the unemployment rate is projected to be quite modest
relative to previous cycles. We expect the rate to increase to
6 percent by the end of 2009, before declining thereafter.
Increasing unemployment is expected to see wage
inflation trend lower over the projection. While annual wage
inflation is likely to hold up through to early 2009, quarterly
wage growth appears to have already peaked, consistent
with firms reporting an easing in skill shortages.
24
Reserve Bank of New Zealand: Monetary Policy Statement, December 2008
Figure 5.8
recent and projected policy easing is likely to be more muted
Employment growth and the unemployment
and protracted than in previous cycles.
rate
Figure 5.9
Annual %
6
Projection
%
12
(percent of trend output)
Employment
4
10
2
8
0
6
-2
4
Unemployment (RHS)
-4
1990
1994
1998
2002
2006
Source: Statistics New Zealand, RBNZ estimates.
Household spending
2010
%
70
Projection
%
70
68
68
66
66
64
64
62
62
2
60
Household spending and house
1990
1994
1998
2002
2006
Source: Statistics New Zealand, RBNZ estimates.
2010
60
price inflation
Householders remain under considerable pressure. While
Further out in the projection, supported by still-
some relief is coming from lower fuel prices, personal tax
positive real income growth and further personal tax cuts,
cuts, and falling mortgage rates, the cost of living remains
consumption spending is expected to recover somewhat.
well above year-ago levels and the effective mortgage rate
Despite this, over the projection as a whole, the outlook for
remains high. Furthermore, asset prices – most obviously
consumption is very weak. Indeed, our projection implies
houses, but also equity and debt investments – have fallen
a sizable improvement in the household saving rate from
markedly over the past year, reducing household wealth.
around -11 percent of disposable income currently, to about
As a result, householders are trimming their expenditure
-2 percent by the end of the projection.
– by reducing retail spending and residential construction.
Turning to the housing market, indicators such as house
Indeed, we estimate that household spending, as a share of
sales and days to sell suggest that residential investment and
total output, has already fallen to a level broadly similar to its
house prices are likely to continue to fall over the coming
average of the 1990s (figure 5.9).
quarters. In terms of residential investment, we project this
Consumption spending is likely to remain subdued
to continue to decline from its current very low levels until
throughout 2009. In this regard, we note that the near-
mid-2009, before posting a modest recovery. This modest
term benefit to householders of recent Official Cash Rate
recovery is predicated on our view that there is not currently
reductions are likely to be quite muted relative to previous
an oversupply of houses in New Zealand.
easing cycles. Most obviously, the proportion of mortgage
As for house prices, further downward adjustment from
borrowers on fixed rates is much higher than in previous
current overvalued prices is expected over the coming year or
cycles, meaning that it will take longer for the household
so, with next to no recovery of substance over the remainder
sector to benefit from lower mortgage rates.
of the projection. From their peak in 2007, nominal house
In addition, credit pressures have seen banks tighten
prices are projected to fall 16 percent by the end of 2010, or
their lending criteria and increase the spread between
24 percent in real terms – slightly more than was projected
lending rates and forward expectations of the Official Cash
in the September Statement. Such moderation would bring
Rate. Indeed, most borrowers now need a deposit of at least
house prices to a level more in line with fundamentals. There
20 percent to obtain some of the lower mortgage rates
is a risk of house prices falling by more than this.
available in the market. As such, the benefit to borrowers of
Reserve Bank of New Zealand: Monetary Policy Statement, December 2008
25
Business investment
Government
Credit availability tightened over the past year and growth in
Fiscal policy is expected to provide significant support to
business credit has been easing gradually. While some firms
economic activity over the projection. The forecasts contained
have been able to draw on existing credit lines, the availability
in the Pre-Election Economic and Fiscal Update suggest that
of new credit is likely to remain constrained over the coming
gains in government spending will outstrip growth in the
year, particularly given financial market developments
rest of the economy through this time (figure 5.11).
since September. This will reduce firms’ ability to invest,
Figure 5.11
particularly those involved in non-residential construction.
Government spending
Further, weak demand and compressed profit margins mean
(excluding military spending, percent of trend
many firms will be reluctant to undertake significant capital
output)
investment – especially as recent depreciation in the New
%
20.5
Zealand dollar will be pushing up imported capital prices.
Consistent with our own expectation that aggregate activity
Projection
%
20.5
20.0
20.0
19.5
19.5
19.0
19.0
will remain sluggish, businesses expect significant spare
capacity to develop over the coming year.
As such, we expect core investment spending as a share
of trend output to decline noticeably over the coming year
to a level last seen in the early 1990s recession (see box B
for a discussion of past cycles in business investment). From
2010, the combination of current healthy balance sheets,
monetary and fiscal stimulus, improved exporter incomes,
and an assumed normalisation in credit conditions, is
expected to see business investment recover, particularly in
the traded sector (figure 5.10). Global developments over the
18.5
2000
2002
2004
2006
2008
Source: Statistics New Zealand, RBNZ estimates.
2010
18.5
Note that, in line with recent pre-election commitments,
we expect personal income taxes to be reduced more quickly
and to a greater extent than was assumed in the September
Statement.
coming months and quarters will be crucial in determining
the extent and timing of any recovery.
Figure 5.10
Gross domestic product
Business investment
We believe GDP contracted further in the September
(excluding computer and intangible assets,
quarter, the third consecutive quarterly decline. And with
percent of trend output)
fallout from the housing market downturn, low corporate
%
14
Projection
%
14
profitability, and the lagged effects of tight monetary
conditions continuing, near-term aggregate activity is likely
13
13
12
12
Global developments of the past two months have
11
11
seen the outlook for domestic activity deteriorate to an
10
10
9
9
extent, oil prices have more than halved over the past few
8
months, the New Zealand dollar has moved significantly
8
1990
1994
1998
2002
2006
Source: Statistics New Zealand, RBNZ estimates.
2010
to remain sluggish.
even greater extent than was projected in the September
Statement. Offsetting these negative impulses to some
lower, and personal income taxes are to be reduced further.
In aggregate, sub-trend GDP growth is projected
to continue through to the second half of 2009. Indeed,
26
Reserve Bank of New Zealand: Monetary Policy Statement, December 2008
Box B
in recent years by the high New Zealand dollar, which
Business investment contractions
has reduced the price of investment goods, and by firms
We project a very sharp decline in business investment
during 2009, with only a modest recovery thereafter. This
box tries to put the projected contraction into an historical
context, by lining up the assumed peak in business
needing to build capacity in the face of very strong demand.
Both of these drivers have now turned around significantly.
Transport equipment spending is also expected to decline
to a similar degree over the coming quarters.
investment (June quarter 2008) with the peaks that
Figure B2
preceded the downturns in business investment during
Plant and machinery investment
(excluding computers, quarter zero = 100)
the 1990s.
The decline in aggregate business investment over this
cycle is expected to be deeper than that experienced in the
late-1990s recession (figure B1). This is because the fall in
output in the late-1990s recession was concentrated in the
generally less investment-intensive primary sector, while the
Index
120
110
The magnitude and duration of the current downturn in
70
expected to be quite as deep.
60
110
100
90
80
the early-1990s recession, although the trough is not
Late 1990s
100
current downturn is expected to be more broadly based.
business investment is closer to that experienced during
Index
120
90
Current
projection
Early 1990s
80
70
-8
-6
-4
-2
0
2
4
6
8
Quarters
Source: Statistics New Zealand, RBNZ estimates.
Note: Cycles dated to correspond with figure B1.
10
60
However, in contrast to the early-1990s recession,
Figure B1
Business investment
we do not expect this cycle to be driven by a very sharp
(excluding computers and intangible assets,
fall in non-residential investment (figure B3). Unlike in the
cyclical peak = 100)
lead-up to the early 1990s commercial property slump,
Index
110
Index
110
there is much less evidence of a significant over-supply of
commercial buildings, which should lend some support
100
Late 1990s
90
100
to non-residential investment. Conversely, tight credit
90
conditions – particularly in the finance company sector –
are likely to continue to provide a significant drag on this
80
80
Current
projection
70
70
Early 1990s
60
-8
-6
-4
-2
0
2
4
Quarters
6
8
10
60
Source: Statistics New Zealand, RBNZ estimates.
Reflecting its large share (typically around 40 percent)
component.
Figure B3
Non-residential investment
(quarter zero = 100)
Index
140
Index
140
120
120
Current
projection
of the total, lower plant and machinery (ex-computers)
investment is projected to drive the decline in aggregate
business investment. This forecasted decline, excluding the
impact of a large oil-related investment in the June quarter,
is of a similar magnitude and duration to the decline in this
component that occurred during the early-1990s recession
(figure B2). Plant and machinery investment is projected
to be particularly hard-hit, given that it has been buoyed
100
100
Late 1990s
80
80
60
40
Early 1990s
-8
0
2
4
6
8
Quarters
Source: Statistics New Zealand, RBNZ estimates.
Note: Cycles dated to correspond with figure B1.
Reserve Bank of New Zealand: Monetary Policy Statement, December 2008
-6
-4
-2
10
60
40
27
Annual headline inflation is forecast to move higher in
further quarters of negative growth in early 2009 are quite
the final quarter of 2009 – as recent petrol price declines
possible.
Beyond this – assuming some normalisation in credit
drop out of the annual figure – but is expected to trend down
markets – the economy is expected to recover, as the
towards the centre of the target band by the end of the
impact of the weaker currency boosts net exports and easier
projection. Indeed, excluding the first-round impacts of the
monetary and fiscal conditions assist economic activity more
Emissions Trading Scheme, annual CPI inflation is expected
generally.
to be about 2.3 percent by the end of the projection (figure
5.13).
Inflation
Figure 5.13
From its current peak of 5.1 percent, we expect annual CPI
CPI inflation
inflation to decline markedly. Recent petrol price declines
(annual)
are expected to drive tradable inflation sharply lower such
%
6
Projection
that annual headline inflation is forecast to briefly fall to 1.6
percent in the September quarter of next year.
We expect non-tradable inflation to remain elevated in
%
6
5
5
4
4
the near term as recent retail electricity price increases show
up in the CPI. Beyond this, the build-up of significant spare
capacity through the second half of 2008 and the first half
Inc-ETS
3
2
Ex-ETS
of 2009 is expected to drive non-tradable inflation lower
1
(figure 5.12).
2000
2002
2004
2006
2008
2010
3
2
1
Source: Statistics New Zealand, RBNZ estimates.
Figure 5.12
Tradable and non-tradable inflation
(ex-ETS, annual)
%
8
Projection
6
%
8
6
Non-tradable
4
4
2
2
0
0
-2
-4
-2
Tradable
2000
2002
2004
2006
2008
2010
-4
Source: Statistics New Zealand, RBNZ estimates.
28
Reserve Bank of New Zealand: Monetary Policy Statement, December 2008
Appendix A1
Summary tables
Table A
Projections of CPI inflation and monetary conditions
(CPI and GDP are percent changes)
2002
2003
2004
2005
2006
2007
2008
2009
2010
Mar
Jun
Sep
Dec
Mar
Jun
Sep
Dec
Mar
Jun
Sep
Dec
Mar
Jun
Sep
Dec
Mar
Jun
Sep
Dec
Mar
Jun
Sep
Dec
Mar
Jun
Sep
Second half average
First half average
Second half average
First half average
Second half average
Quarterly projections
2008
2009
1
2
Mar
Jun
Sep
Dec
Mar
CPI2
CPI2
TWI
90-day
Quarterly
0.6
1.0
0.5
0.6
0.4
0.0
0.5
0.7
0.4
0.8
0.6
0.9
0.4
0.9
1.1
0.7
0.6
1.5
0.7
-0.2
0.5
1.0
0.5
1.2
0.7
1.6
1.5
0.6
0.5
0.8
0.5
0.7
Annual
2.6
2.8
2.6
2.7
2.5
1.5
1.5
1.6
1.5
2.4
2.5
2.7
2.8
2.8
3.4
3.2
3.3
4.0
3.5
2.6
2.5
2.0
1.8
3.2
3.4
4.0
5.1
4.3
2.7
2.1
2.6
2.3
51.6
54.6
53.9
56.4
60.6
61.1
62.4
63.9
66.9
64.0
66.3
68.6
69.6
70.8
69.7
71.5
68.2
62.8
63.6
67.0
68.8
72.0
71.4
71.0
71.9
69.3
65.5
61.8
54.3
52.8
52.7
53.8
bank bill rate
5.0
5.8
5.9
5.9
5.8
5.4
5.1
5.3
5.5
5.9
6.4
6.7
6.9
7.0
7.0
7.5
7.5
7.5
7.5
7.6
7.8
8.1
8.7
8.8
8.8
8.8
8.8
7.4
5.4
5.1
5.3
5.7
CPI
Quarterly
CPI
Annual
GDP
Quarterly
GDP
Annual average
0.7
1.6
1.5
-0.3
0.2
3.4
4.0
5.1
3.6
3.1
-0.3
-0.2
-0.3
0.2
3.2
2.6
1.8
0.7
Notes for these tables follow on pages 32 and 33.
Excludes the first-round impacts of the Emissions Trading Scheme.
Reserve Bank of New Zealand: Monetary Policy Statement, December 2008
29
30
Reserve Bank of New Zealand: Monetary Policy Statement, December 2008
2.3
4.6
GDP (production, March qtr to March qtr)
Percentage point contribution to the growth rate of GDP.
3.6
GDP (production)
1
3.5
Expenditure on GDP
4.0
Imports of goods and services
Gross national expenditure
3.0
3.8
Stockbuilding1
Exports of goods and services
3.9
0.1
Final domestic expenditure
6.8
4.6
4.9
5.0
7.2
7.8
4.7
-0.1
4.9
7.8
14.6
7.1
16.7
23.6
2.0
Total
Non-market government sector
Business
Residential
5.3
4.3
4.0
12.7
0.9
7.8
0.2
7.8
13.1
14.2
12.2
15.0
2.4
3.8
3.8
12.5
4.6
6.4
0.3
5.9
9.2
5.4
12.1
2.9
4.8
4.2
2.9
2.9
2.9
4.2
0.0
4.3
-0.5
4.7
4.4
-1.3
8.4
-5.2
4.8
5.1
4.7
2006
2.4
1.8
2.5
-1.6
3.1
0.9
-0.9
1.9
-1.9
-8.5
-0.8
-2.7
3.1
4.0
2.9
2007
2.2
3.2
2.4
9.7
2.3
4.9
0.9
3.7
4.3
-15.9
6.9
3.8
3.5
4.1
3.3
2008
-0.3
2.7
1.3
0.1
1.6
-5.6
-0.4
-0.5
0.8
0.8
-0.7
-0.1
-0.8
0.1
-0.5
-0.8
-6.3
25.4
-8.8
-6.6
-3.9
-12.8
1.9
-22.0
1.3
3.4
0.7
0.2
3.3
-0.7
2010
Projections
2009
6.2
4.9
5.0
2005
Market sector:
4.1
1.4
6.6
2004
3.0
4.0
Public authority
4.9
2003
Actuals
Gross fixed capital formation
Total
2.8
2002
Private
Final consumption expenditure
March year
(annual average percent change, unless specified otherwise)
Table B
Composition of real GDP growth
4.6
4.3
4.2
4.1
7.0
3.4
-0.1
3.5
9.0
9.0
8.6
10.5
1.9
2.8
1.6
2011
Reserve Bank of New Zealand: Monetary Policy Statement, December 2008
31
5.4
50.2
3.6
3.4
0.2
3.5
5.2
1.6
Monetary conditions
90-day rate (year average)
TWI (year average)
Output
GDP (production, annual average % change)
Potential output (annual average % change)
Output gap (% of potential GDP, year average)
Labour market
Total employment
Unemployment rate (March qtr, seasonally adjusted)
Trend labour productivity
1
Excludes the first-round impacts of the Emissions Trading Scheme.
World economy
Trading partner GDP (annual average % change)
Trading partner CPI (TWI-weighted, annual % change)
1.6
1.3
1.9
-3.1
4.2
-3.7
2.6
2.1
-2.9
-3.5
Price measures
CPI¹
Labour costs
Import prices (in New Zealand dollars)
Export prices (in New Zealand dollars)
Key balances
Government operating balance (% of GDP, year to June)
Current account balance (% of GDP)
Terms of trade (OTI measure, annual average % change)
Household saving rate
(% of disposable income)
2002
March year
(annual percent change, unless specified otherwise)
Summary of economic projections
Table C
3.1
2.2
1.5
-3.4
-5.7
-10.3
1.5
4.8
1.4
4.9
3.8
1.2
5.9
56.4
2.5
2.2
-11.1
-15.5
2003
3.3
1.4
5.3
-4.8
3.9
-9.7
3.1
4.1
1.2
4.3
3.7
1.8
5.3
63.6
1.5
2.1
-10.5
-5.1
2004
3.7
2.1
4.2
-6.9
5.8
-9.3
3.4
3.8
1.2
3.8
3.2
2.2
6.5
67.1
2.8
2.5
0.5
4.9
2005
Actuals
3.6
2.4
7.3
-9.3
-0.8
-11.7
2.6
3.9
1.1
2.9
3.0
2.1
7.3
70.1
3.3
3.0
6.9
3.6
2006
3.6
1.9
4.9
-8.4
1.9
-12.7
1.7
3.7
1.4
1.8
2.8
1.2
7.6
65.6
2.5
3.0
0.3
4.8
2007
3.9
3.3
1.3
-8.0
7.8
-10.6
-0.2
3.7
1.8
3.2
2.7
1.6
8.6
71.6
3.4
3.5
0.7
12.5
2008
1.7
3.2
0.9
-7.9
-1.0
-6.3
-0.2
5.1
2.1
0.1
2.8
-1.1
7.2
61.9
3.1
3.5
28.3
15.0
2009
1.4
1.9
0.1
-7.4
-7.6
-3.4
-0.9
6.0
2.2
1.3
2.7
-2.5
5.2
52.9
2.7
2.8
4.9
-1.0
2010
Projections
2.9
2.0
0.1
-6.1
-0.2
-2.4
1.1
5.4
2.0
4.3
2.5
-0.8
5.7
53.9
2.3
2.1
-2.1
0.6
2011
Notes to the tables
CPI
Consumer Price Index. Quarterly projections rounded to one decimal place.
TWI
RBNZ. Nominal Trade Weighted Index of the exchange rate. Defined as a
geometrically-weighted index of the New Zealand dollar bilateral exchange rates
against the currencies of Australia, Japan, the United States, the United Kingdom and
the euro area.
90-day bank bill rate
RBNZ. Defined as the interest yield on 90-day bank bills.
World GDP
Reserve Bank definition. 12-country index, export weighted. Seasonally adjusted.
World CPI inflation
Reserve Bank definition. 5-country index, TWI weighted.
Import prices
Domestic currency import prices. Overseas Trade Indexes.
Export prices
Domestic currency export prices. Overseas Trade Indexes.
Terms of trade
Constructed using domestic currency export and import prices. Overseas Trade Indexes.
Private consumption
System of National Accounts.
Public authority consumption
System of National Accounts.
Residential investment
RBNZ definition. Private sector and government market sector residential
investment. System of National Accounts.
Business investment
RBNZ definition. Total investment less the sum of non-market investment and
residential investment. System of National Accounts.
Non-market investment
RBNZ definition. The System of National Accounts annual nominal government
non-market/market investment ratio is interpolated into quarterly data. This ratio
is used to split quarterly expenditure GDP government investment into market and
non-market components.
Final domestic expenditure
RBNZ definition. The sum of total consumption and total investment.
System of National Accounts.
Stockbuilding
Percentage point contribution to the growth of GDP by stocks.
System of National Accounts.
Gross national expenditure
Final domestic expenditure plus stocks. System of National Accounts.
Exports of goods and services
System of National Accounts.
Imports of goods and services
System of National Accounts.
GDP (production)
System of National Accounts.
Potential output
RBNZ definition and estimate. Refer to Conway, P and B Hunt (1997),
‘Estimating Potential Output: a semi-structural approach’, Reserve Bank of New
Zealand Discussion Paper, G97/9.
Output gap
RBNZ definition and estimate. The percentage difference between real GDP
(production, seasonally adjusted) and potential output GDP.
Current account balance
Balance of Payments.
Total employment
Household Labour Force Survey.
Unemployment rate
Household Labour Force Survey.
Household saving rate
Household Income and Outlay Account.
32
Reserve Bank of New Zealand: Monetary Policy Statement, December 2008
Government operating balance
Historical source: The Treasury. Adjusted by the RBNZ over the projection period.
Labour productivity
The series shown is the annual percentage change in a trend measure of
labour productivity. Labour productivity is defined as GDP (production) divided by
Household Labour Force Survey hours worked.
Labour cost
Private sector all salary and wage rates. Labour Cost Index.
Real gross domestic income
The real purchasing power of domestic income, taking into account changes in the
terms of trade. System of National Accounts.
Quarterly percent change
(Quarter/Quarter-1 - 1)*100
Annual percent change
(Quarter/Quarter-4 - 1)*100
Annual average percent change
(Year/Year-1 - 1)*100
Source: Unless otherwise specified, all data conform to Statistics New Zealand definitions, and are not seasonally adjusted.
Rounding: All projections data are rounded to one decimal place.
Reserve Bank of New Zealand: Monetary Policy Statement, December 2008
33
Appendix B
Companies and organisations contacted by RBNZ staff
during the projection round
3 Architecture Ltd
NZ Seafood Industry Council
ABB Limited
Port Taranaki Ltd
Ali Ach Industries
PricewaterhouseCoopers
Auckland International Airport Ltd
Property Council New Zealand
Auckland Regional Transport Authority
Registered Master Builders Federation
Blue Sky Meats Ltd
Skyline Enterprises Ltd
Budget Rent A Car Ltd
Smith & Caughey Ltd
Destination Queenstown
Southland Building Society Ltd
Electronic Services Ltd
Subaru of New Zealand Ltd
Energy Direct NZ Ltd
Suzuki New Zealand Ltd
Eurotech Design Limited
Tait Electronics Ltd
Federated Farmers of NZ Inc.
Talbot Plastics Ltd
Fresh Vegetables Product Group Ltd
Taranaki Sawmills Ltd
Fullers Group Ltd
Telstraclear Ltd
GDM Group Ltd
Todd Energy Limited
H & J Smith Ltd
Transfield Worley Ltd
Harrison Grierson Consultants Ltd
TSB Bank Ltd
Healtheries of New Zealand Ltd
Veda Advantage Ltd
Heritage Queenstown
Vodafone New Zealand Ltd
J Ballantyne & Co Ltd
Wight Aluminium Ltd
Jade Software Corporation Ltd
Yunca Group Ltd
JJ Limited
Kiwi Discovery Shop Ltd
Kiwibank Limited
Kordia Solutions Ltd
Lichfield International Ltd
Life Pharmacy Ltd
Lion Nathan New Zealand Ltd
Lyttelton Engineering Ltd
Lyttelton Port Christchurch Ltd
Mace Engineering Ltd
M-Co Marketplace Company Limited
Meat Industry Association
Meco Engineering Co Ltd
Millbrook Resort Ltd
Morning Star Trading Ltd
Motor Trade Association
National Aluminium Ltd
34
Reserve Bank of New Zealand: Monetary Policy Statement, December 2008
Appendix C
Reserve Bank statements on monetary policy
OCR reduced to 7.5 percent
OCR reduced to 6.5 percent
11 September 2008
23 October 2008
The Reserve Bank today reduced the Official Cash Rate (OCR)
The Reserve Bank today reduced the Official Cash Rate
by 50 basis points from 8.0 percent to 7.5 percent.
(OCR) from 7.5 percent to 6.5 percent.
Reserve Bank Governor Alan Bollard said: “The New
Reserve Bank Governor Alan Bollard commented that
Zealand economy is experiencing a marked slowdown,
“ongoing financial market turmoil and a deteriorating
led primarily by the household sector. The outlook for the
outlook for global growth have played a large role in shaping
global economy has deteriorated further in the wake of
today’s decision.
continued financial market turmoil. In addition, the New
“Economic activity in New Zealand will be further
Zealand business sector is coming under pressure from both
constrained, relative to the outlook presented in our
rising costs and falling demand. While domestic activity is
September Monetary Policy Statement, by these international
likely to pick up late this year as a result of personal tax cuts,
developments. New Zealand can expect to face lower
increased government spending and rising rural incomes, we
demand for exports and credit is likely to be less readily
expect a prolonged period of household sector adjustment
available. In this environment consumers and businesses are
and below-average growth.
likely to be more cautious and curtail spending.
“The weakness in economic activity is expected to
“The reduction in domestic spending will be partly offset
translate into lower inflation pressures in the medium term.
by the depreciation of the New Zealand dollar over the past
Headline inflation is expected to peak around 5 percent in the
few months, falling oil prices and the recent loosening of
current September quarter before trending down thereafter.
fiscal policy.
However, food price inflation, exchange rate depreciation
“With weaker short-term growth and sharply lower oil
and higher wage costs will tend to keep headline inflation at
prices we now expect that annual CPI inflation will return
elevated levels through 2009.
to the target band of 1 to 3 percent around the middle of
“With medium-term inflation pressures expected to ease,
2009. However, we still have concerns that domestically
it is appropriate to move towards a less restrictive monetary
generated inflation (particularly in labour costs, local body
policy stance. Compared to the June Monetary Policy
rates, electricity prices and construction costs) is remaining
Statement, we have brought forward some of the projected
stubbornly high.
interest rate reduction, but have not altered the expected
“Consistent with the Policy Targets Agreement, the
overall decline. We believe this response is warranted in
Bank’s focus will remain on medium-term inflation. Should
light of the tightness of current credit conditions and the
the outlook for inflation evolve as projected we would expect
time it will take to affect the actual interest rates faced by
to lower the OCR further. However, the timing and extent
households and businesses.
of OCR reductions over the coming months will depend on
“Looking ahead, the scale and timing of further official
cash rate reductions will depend on signs of declining
evidence of actual reductions in domestic cost pressures as
well as how the global financial developments play out.”
inflation pressures and on exchange rate adjustments.”
Reserve Bank of New Zealand: Monetary Policy Statement, December 2008
35
Appendix D
The Official Cash Rate chronology
Date OCR
(percent)
Date OCR
(percent)
Date OCR
(percent)
17 March 1999
4.50
4 September 2003 5.00
24 April 2008
8.25
21 April 1999 4.50
23 October 2003 5.00
5 June 2008
8.25
19 May 1999 4.50
4 December 2003
5.00
24 July 2008
8.00
30 June 1999 4.50
29 January 2004
5.25
11 September 2008
7.50
18 August 1999 4.50
11 March 2004
5.25
23 October 2008
6.50
29 September 1999 4.50
29 April 2004
5.50
17 November 1999 5.00
10 June 2004
5.75
19 January 2000 5.25
29 July 2004
6.00
15 March 2000 5.75
9 September 2004
6.25
19 April 2000 6.00
28 October 2004
6.50
17 May 2000 6.50
9 December 2004
6.50
5 July 2000
6.50
27 January 2005
6.50
16 August 2000
6.50
10 March 2005
6.75
4 October 2000 6.50
28 April 2005
6.75
6 December 2000
6.50
9 June 2005
6.75
24 January 2001 6.50
28 July 2005
6.75
14 March 2001 6.25
15 September 2005
6.75
19 April 2001
6.00
27 October 2005
7.00
16 May 2001 5.75
8 December 2005
7.25
4 July 2001
5.75
26 January 2006
7.25
15 August 2001 5.75
9 March 2006
7.25
19 September 2001 5.25
27 April 2006
7.25
3 October 2001 5.25
8 June 2006
7.25
14 November 2001 4.75
27 July 2006
7.25
23 January 2002 4.75
14 September 2006
7.25
20 March 2002
5.00
26 October 2006
7.25
17 April 2002
5.25
7 December 2006
7.25
15 May 2002
5.50
25 January 2007
7.25
3 July 2002
5.75
8 March 2007
7.50
14 August 2002
5.75
26 April 2007
7.75
2 October 2002
5.75
7 June 2007
8.00
20 November 2002
5.75
26 July 2007
8.25
23 January 2003
5.75
13 September 2007
8.25
6 March 2003 5.75
25 October 2007
8.25
24 April 2003 5.50
6 December 2007
8.25
5 June 2003 5.25
24 January 2008
8.25
24 July 2003 5.00
6 March 2008
8.25
36
Reserve Bank of New Zealand: Monetary Policy Statement, December 2008
Appendix E
Upcoming Reserve Bank Monetary Policy Statements and
Official Cash Rate release dates
The following is the Reserve Bank’s schedule for the release of Monetary Policy Statements and Official Cash Rate
announcements for 2009:
2009
29 January
OCR announcement
12 March
Monetary Policy Statement
30 April
OCR announcement
11 June
Monetary Policy Statement
30 July
OCR announcement
10 September
Monetary Policy Statement
29 October
OCR announcement
10 December
Monetary Policy Statement
The announcement will be made at 9:00 am on the day concerned. Please note that the Reserve Bank reserves the right
to make changes, if required due to unexpected developments. In that unlikely event, the markets and the media would be
given as much warning as possible.
Reserve Bank of New Zealand: Monetary Policy Statement, December 2008
37
Appendix F
Policy Targets Agreement
This agreement between the Minister of Finance and the Governor of the Reserve Bank of New Zealand (the Bank) is made
under section 9 of the Reserve Bank of New Zealand Act 1989 (the Act). The Minister and the Governor agree as follows:
1. Price stability
a) Under Section 8 of the Act the Reserve Bank is required to conduct monetary policy with the goal of maintaining a stable
general level of prices.
b) The objective of the Government’s economic policy is to promote sustainable and balanced economic development in
order to create full employment, higher real incomes and a more equitable distribution of incomes. Price stability plays
an important part in supporting the achievement of wider economic and social objectives.
2. Policy target
a) In pursuing the objective of a stable general level of prices, the Bank shall monitor prices as measured by a range of price
indices. The price stability target will be defined in terms of the All Groups Consumers Price Index (CPI), as published by
Statistics New Zealand.
b) For the purpose of this agreement, the policy target shall be to keep future CPI inflation outcomes between 1 percent
and 3 percent on average over the medium term.
3. Inflation variations around target
a) For a variety of reasons, the actual annual rate of CPI inflation will vary around the medium-term trend of inflation, which
is the focus of the policy target. Amongst these reasons, there is a range of events whose impact would normally be
temporary. Such events include, for example, shifts in the aggregate price level as a result of exceptional movements in
the prices of commodities traded in world markets, changes in indirect taxes, significant government policy changes that
directly affect prices, or a natural disaster affecting a major part of the economy.
b) When disturbances of the kind described in clause 3(a) arise, the Bank will respond consistent with meeting its mediumterm target.
38
Reserve Bank of New Zealand: Monetary Policy Statement, December 2008
4. Communication, implementation and accountability
a) On occasions when the annual rate of inflation is outside the medium-term target range, or when such occasions
are projected, the Bank shall explain in Policy Statements made under section 15 of the Act why such outcomes have
occurred, or are projected to occur, and what measures it has taken, or proposes to take, to ensure that inflation
outcomes remain consistent with the medium-term target.
b) In pursuing its price stability objective, the Bank shall implement monetary policy in a sustainable, consistent and
transparent manner and shall seek to avoid unnecessary instability in output, interest rates and the exchange rate.
c) The Bank shall be fully accountable for its judgements and actions in implementing monetary policy.
Hon Dr Michael Cullen
Dr Alan E Bollard
Minister of Finance
Governor
Reserve Bank of New Zealand
Dated at Wellington this 24th day of May 2007
Reserve Bank of New Zealand: Monetary Policy Statement, December 2008
39
40
Reserve Bank of New Zealand: Monetary Policy Statement, December 2008
42
Reserve Bank of New Zealand: Monetary Policy Statement, December 2008